SPR "Backfire" Trade?

The following chart comes from FT.Alphaville’s Izabella Kaminska. (Link) I want to make a few points about this.

Look at the names of those who bought the crude from the SPR. See any ‘good guys’ on the list? I didn’t.

Note that the basis of pricing for the SPR sales is a formula based on Louisiana Light Sweet (“LLS”) pricing. I have been pounding the table for some time that LLS is the benchmark that should be looked at when considering the true cost of energy in the US. That the SPR sales did not get linked to the WTI pricing is the best evidence that I can think of to confirm that the NYMEX’s oil contract is irrelevant.

The crude futures are still going to be the benchmark for all of the talking heads and even the better news rags. But if one wants to look at the macro consequences of changing energy prices, LLS is the place to go. (link)

There is evidence that the SPR sales have had a depressing affect on LLS pricing. I wanted to measure the results to date. I think in less than one month any beneficial effects will be gone.

The IEA/SPR deal was leaked. The market insiders knew this was coming. The CFTC has promised an inquiry. Don’t hold your breath. Because there was price distortion pre the actual announcement, there is no true apples-to-apples price comparisons. I use the opening rate. I don’t believe the information was leaked at that point. The results:

Note that LLS has gone from a premium to Bent of $2.50 to a discount of $3.22 (5%). That is a pretty big swing in this spread. But when you consider that $1 drop in the price of a barrel translates to 2 cents at the pump, the results suggest that this means a 10-cent drop in gas that can be directly attributable to the SPR sales.

Ho Hum, is my reaction. The real question is what might happen next.

I asked a Greek friend who owns tankers. A synopsis of his thoughts:

At any given time there is about 100 large tankers on the ocean. That translates to about 100mm barrels of crude. Some of this is on long term charter with cargoes being deliver that are also under contract. Another portion is not committed and constitutes floating storage that heads to the geographic destination where the highest value for the cargo can be achieved.

He gave as one example; Nigerian crude. This is "light" and is deliverable through the LOOP (Louisiana offshore oil delivery) or alternatively it could go to a refiner in Rotterdam.

Your average large crude carrier has an operating cost of $60,000 per day. It takes 10 extra days to deliver crude to the LOOP versus Rotterdam (5 days in, 5 days out). Therefore there is an opportunity cost of $600k to make a USA delivery.

This is the equivalent of another 65 cents on the Brent spread. As of today the adjusted Bent/LLS discount is $3.85. That comes to about $4 million on a 1mm brl. cargo.

The obvious conclusion from the Greek shipper is that cargoes are going to be diverted away from Louisiana as result of the negative spread. There is big money to be made.

His expectation is that the premium of 1-2 dollars has to come back. He added that the adjustment process may not be smooth. Once cargoes do get diverted they do not change direction. This guy thinks the US has set itself up for an inventory shortfall as a result. The end result could be that the premium for LLS has to widen to about $5 to get cargoes headed to the US.

If this fellow has it right, then gas is headed right back up in a month or two. It might end up even higher than it was before June 22. That would be a kick in the pants for those who tried to manipulate this very big market.